Visit vanguard.com or contact your broker to obtain a Vanguard ETF or fund prospectus which contains investment objectives, risks, charges, expenses, and other information; read and consider carefully before investing.

Vanguard ETF Shares are not redeemable with the issuing Fund other than in Creation Unit aggregations. Instead, investors must buy or sell Vanguard ETF Shares in the secondary market with the assistance of a stockbroker. In doing so, the investor may incur brokerage commissions and may pay more than net asset value when buying and receive less than net asset value when selling.

Investments in bond funds are subject to interest rate, credit, and inflation risk.

Diversification does not ensure a profit or protect against a loss in a declining market.

Stocks of companies in emerging markets are generally more risky than stocks of companies in developed countries.

An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although a money market fund seeks to preserve the value of your investment at $1 per share, it is possible to lose money by investing in such a fund.

All investing is subject to risk, including possible loss of principal.

In a post last month, I mentioned the skepticism we hear from time to time about Vanguard’s client-owned, at-cost structure.

In brief, under this novel structure the various Vanguard mutual funds own the operating company—The Vanguard Group, Inc.—that exists to serve those funds. No other owner pulls a profit from the operating company.

It’s clear from your comments that skepticism still abounds, along with a fair amount of curiosity, and even a good portion of gratitude for Vanguard’s unique client-owned structure. In this post, I’ll respond to some of those questions and comments.

Executive compensation

About one in four comments focused on the compensation of Vanguard executives.

“How much does CEO McNabb make . . . How about the compensation packages for the Directors . . . How about the top 100 compensated employees.”

Although I know this response won’t satisfy those concerned about compensation, Vanguard’s view is simple: We don’t disclose the compensation earned by any crew member. We believe that compensation matters deserve the same privacy protections that we provide to shareholders and their account information.

So how do you know Vanguard’s executives aren’t enriching themselves at your expense?

You have to rely on your elected representatives: The eight independent directors of Vanguard’s board, who together comprise the board’s compensation committee. One key part of their job is to review and determine each year the compensation of senior officers to ensure that compensation levels are fair, competitive, and most importantly, designed with the best interests of fund shareholders in mind. These board members all are Vanguard investors, too, and they take their responsibility to fellow shareholders quite seriously.

Stewardship: The proof is in the pudding

You may not like having to rely on others to determine what’s “fair.” But I think it’s reasonable to suggest that the proof of good stewardship is in the pudding:

• Vanguard has existed for 35 years, and the average expense ratio for our mutual funds has declined substantially over that span—from 0.89% in 1975 to about 0.20% in 2010. Over that same period, the average expense ratio for all mutual funds throughout our industry has risen slightly—from 1.08% to 1.19%. All compensation for Vanguard’s crew, directors, and senior leaders is part of our funds’ expense ratios, and incentives are based on various factors, including long-term fund performance, service quality, and controlling our operating costs.

• Through the years, Vanguard’s officers and fund trustees have on numerous occasions closed or restricted purchases into various funds when they believed cash inflows might cause those funds’ performance to suffer. Turning away business probably isn’t something you’d associate with a “growth at all costs” mentality.

• Vanguard has a long track record of alerting investors to the risks of investing—not merely highlighting the potential rewards. We don’t run advertisements touting the returns of a hot fund. All of this is entirely consistent with a client-owned company with a long-term investment philosophy that puts clients’ interests first.

As a former journalist, I understand the keen interest in how much various individuals make—whether in business, government, sports, or entertainment. Each investor has to decide whether executive compensation is vital information for making an investment decision, and how much weight to give to other fundamentals—the total cost paid for the investment, taxes, objectives and risks, and long-term performance.

Will Vanguard’s structure change?

“What could happen to change this corporate structure,” asked one reader. “What assurance is there that this ship will not change course?”

I went straight to the boss on this one. When I asked Bill McNabb, our chairman and chief executive officer, if there’s any chance of a change in course, he said simply: “No way.”

Managing investment risks

A few readers asked how Vanguard’s investment analysts and portfolio managers try to avoid the kinds of securities that blew up during the credit crisis.

As one wrote: “What keeps the people who do research for the bond funds, and those who run them, from buying dangerous instruments?”

Besides the experience and skill they bring to bear, investment analysts and portfolio managers also have an advantage that stems from Vanguard’s client-owned, at-cost structure. The fact that our fund expense ratios are generally well below those of competing funds allows our investment professionals to position the funds more conservatively, giving up some potential yield on riskier investments while still seeking to provide very competitive yields.

Vanguard’s advertising

Some readers asked about our advertising expenditures and how we determine whether to spend money on advertising.

The short answer is that we don’t spend anything on advertising unless we believe it will benefit our clients over time by attracting clients whose assets will help us to continue reducing expense ratios. The long answer? Well, that was in an earlier post.

A word in self defense

Speaking of expense ratios, I should address one more minor thread in response to the post.

A few readers took swipes at a comment posted on the blog on March 27, which itself was a reply to a March 25 comment. The March 27 comment equated an expense ratio of 0.25% to “one-quarter of 1 cent for every hundred dollars under management.” Some folks assumed I had written the response.

One commenter wrote: “But seriously, I just hope the people at Vanguard who are actually managing my money are somewhat better at math than those who do planning & development.”

Another wrote: “It is astounding that he (Craig Stock), who is supposed to understand the arithmetic of money matters, should state that 0.25% is equivalent to ¼ cent per $100. . . . Stock was off by a factor of 100, and yet he has not come back with anything by way of a mea culpa.”

First, I issued no mea culpa for a simple reason: I didn’t post the comment with the error in arithmetic. One of the blog’s readers made the mistake, apparently miscarrying a decimal point.

Second, although I didn’t make the error, I am quite willing to concede that Vanguard’s portfolio managers and investment analysts are better at math than I am. That’s one more reason that I’m glad they’re managing all of my own investments!

Notes:

• All investments are subject to risk. Investments in bond funds are subject to interest rate, credit, and inflation risk.

• Vanguard provides services to the Vanguard funds at-cost.

• “Client-owned” means clients own the funds and the funds own Vanguard.

• Sources for the expense ratio data cited above: Vanguard and Lipper Inc. Data as of March 31, 2010.

Like this:

Craig Stock

Craig Stock heads Vanguard's Corporate Marketing and Communications department, responsible for delivering investor information and education in Vanguard’s "plain talk" style.
Before joining Vanguard in 1995, Craig spent two decades in journalism. At The Philadelphia Inquirer, he reported on business and the economy, served as a business editor, and wrote a column on personal finance.
Craig holds a B.S. from the University of Kansas, and was a Sloan Fellow in Economics Journalism at Princeton University's Woodrow Wilson School. He’s also the author of Investing During Retirement, published in 1997.

Comments

Fred O. | January 2, 2014 2:08 pm

This is just a lot of dissembling, some would call it bull—-. For years I have been hearing how I am an “owner” except I can’t know what “my” employees are being paid? Vanguard is fortunate there are few alternatives is all I can say.

John H. | June 5, 2013 1:35 pm

You can do a little research on the internet and find that the even founder of Vanguard group John Bogle,, says the executive compensation system in this country is broken. He was speaking about Pay without Performance and even he seemed to be complaining of the direction the industry is going. What he said is something I have been feeling for years, and am glad someone could put what I felt into words.
( http://papers.ssrn.com/sol3/papers.cfm?abstract_id=868508 )
Vanguard has been rated as average with the top 100 fund companies for executive compensation plans. They were graded an F for listening to there shareholders on executive pay and a D for giving their shareholders a vote on executive pay. Even with all this, they still have there expense ratios below the industry average on most of there funds. Since they will not disclose there compensation, and there increase is average (percentage wise?) I can only assume their pay was much lower to start with than other companies based on their expense ratio. I just hope they will listen to their founder and keep or adopt his philosophy and not follow what is becoming the norm in this industry and all other industries in this country.

Anonymous | September 19, 2012 9:49 pm

Just sat to reconsider my investments. I was giving this subject a great amount of consideration and agree with many of the postings above. I will give considerable thought to moving many of my investments since VanGuard will not post compensations.

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At Vanguard, we’ve always believed in candid, direct communication with investors. In fact, it’s one of our core principles. In 2009, we created the Vanguard Blog so that we could talk about what’s happening in our industry and in the economy—and hear what’s on the minds of investors like you. More

Connect with Vanguard®

Visit vanguard.com or contact your broker to obtain a Vanguard ETF or fund prospectus which contains investment objectives, risks, charges, expenses, and other information; read and consider carefully before investing.

Vanguard ETF Shares are not redeemable with the issuing Fund other than in Creation Unit aggregations. Instead, investors must buy or sell Vanguard ETF Shares in the secondary market with the assistance of a stockbroker. In doing so, the investor may incur brokerage commissions and may pay more than net asset value when buying and receive less than net asset value when selling.

Investments in bond funds are subject to interest rate, credit, and inflation risk.

Diversification does not ensure a profit or protect against a loss in a declining market.

Stocks of companies in emerging markets are generally more risky than stocks of companies in developed countries.

An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although a money market fund seeks to preserve the value of your investment at $1 per share, it is possible to lose money by investing in such a fund.

All investing is subject to risk, including possible loss of principal.